Rare Munich Re shows strengths amid fall volatility

Munich Re demonstrated its appeal to investors with a twice-subscribed EUR1.25bn Tier 2 trade on 15 November amid market conditions that led to a UK covered bond being pulled, as insurers experienced mixed outcomes in the bouts of volatility that characterised the autumn market.

Ahead of its first subordinated bond in six years, the German insurer announced its plans for a 30.5 non-call 10.5 Reg S Tier 2 trade and roadshowed its benchmark, rated A2/A by Moody’s and Fitch, on the Monday and Tuesday of the week of launch.

It then entered the market on the Thursday morning, the day after the UK cabinet had approved a draft Brexit withdrawal agreement with the EU. Although the market opened relatively stable, a renewed bout of volatility was sparked by UK ministerial resignations, leading TSB to pull a five year sterling FRN after opening books.

Munich Re was nevertheless able to press on with its trade after the leads had opened books with initial price thoughts of the 250bp over mid-swaps area and were soon able to announce a book update above EUR1.25bn. They then set pricing at 240bp over on the back of a book of some EUR2.5bn.

A syndicate banker away from the leads estimated the deal paid a new issue premium of around 25bp, based on fair value of 215bp, taking into account Munich Re’s old outstandings but also comparables from more regular peer Allianz.

“Munich Re has tremendous scarcity value and is strongly rated even for Tier 2,” he said, “so it’s almost a safe haven investment for investors even if it’s subordinated. That is demonstrated by the strong support for the trade in a market where people are very selective — investors know it may be another five years before they can get their hands on this credit again.

“It’s also proof that there is cash to put to work.”

The challenging market conditions had earlier deterred Aegon from launching its inaugural Restricted Tier 1 transaction. The Dutch insurer had on 9 October announced plans for a perpetual non-call 10.5 euro benchmark RT1 and mandated banks for investor meetings from 11 October.

However, Aegon’s issuance plans were put on hold the following week as market conditions deteriorated. The insurer is expected to revive its plans at a more opportune time.

There has been better news for holders of compatriot Vivat’s bonds, with the developing news of troubled Chinese parent Anbang’s plans to sell the company. Aegon as well as ASR have been seen as potential buyers.

“Part of the pushback from investors on Vivat’s issuance was that the ownership was a bit sketchy,” said one syndicate banker, “and now everyone wants to know who’s going to make an offer for it. If you take a look at its perp non-call 2025 RT1 now, it’s a clear outperformer and still trades well above par despite the recent general spread widening.”

Groupama outshines Phoenix

Munich Re’s deal was the first insurance Tier 2 supply in euros since September, when Groupama and then Phoenix Group approached the market in quick succession.

Groupama’s EUR500m no-grow 10 year bullet on 17 September put the seal on its recovery, following the return of its sub debt to investment grade in May 2017 on the back of an upgrade of the insurer from BBB+ to A- by Fitch, which also put the higher rating on positive outlook this April. The new issue was the French insurer’s first transaction since then and also its first wholly new money transaction since 2009.

“Fitch Ratings’ decisions paved the way for the successful debt issuance we conducted in September,” Cyril Roux, CFO of Groupama group, told Bank+Insurance Hybrid Capital (see Q&A for more from Groupama).

Groupama opted for a 10 year bullet structure to achieve full equity credit with Fitch as well as Tier 2 Solvency II treatment, and also offer investors a plain vanilla instrument.

With the market outlook encouraging but uncertain, the insurer and its leads opted for intra-day execution on Monday, 17 September. Books were opened with initial price thoughts of the mid-swaps plus 270bp area for the EUR500m no-grow transaction, and after around two hours orders reached EUR1bn. Another hour and a half later guidance was set at the 255bp area on the back of a EUR1.25bn book. Twenty minutes later, with books above EUR1.35bn comprising more than 110 accounts, the spread was fixed at 250bp over, which the leads said represented a new issue premium of around 10bp.

“All in all, it went very well and we are very satisfied with the outcome,” said Groupama’s Roux.

André Bonnal on the FI syndicate desk at joint bookrunner Crédit Agricole’s said investors were clearly happy to buy into Groupama’s recovery story, buoyed by the January 2027 issue’s performance — it was trading at a cash price of 121 when the new issue was launched — with the 10 year bullet structure also key.

“We were able to tighten by 20bp to finish at 250bp, with a book in the context of EUR1.35bn for a EUR500m deal, with very few drops, which is a very strong sign for the issuer going forward,” he said, “so all in all a top notch transaction that ticked all the boxes.”

Phoenix Group Holdings’ similar EUR500m (£445m) 10 year Tier 2 issued two days later (19 September) encountered a more subdued reception, generating little oversubscription and pricing in the middle of guidance.

The UK issuer had held investor meetings across Europe ahead of the planned trade, rated BBB by Fitch, and went out with initial price thoughts of the 350bp over mid-swaps area. The deal was then priced at 350bp over on the back of some EUR600m of demand.

The transaction was launched in conjunction with Phoenix’s acquisition of Standard Life Assurance, announced in February and completed at the end of August, for close to £3bn. Prior to the euro benchmark, the issuer only had subordinated debt outstanding in sterling and US dollars.

“I think they were looking to increase the investor base here,” said a banker away from the deal, “but it’s a closed-book business and there’s no such thing in continental Europe, and it appears European investors found the credit story difficult to get their heads around.”

Mapfre rides out emerging spike

Mapfre had earlier reopened the subordinated insurance market on 31 August and the wider sub debt market for southern European financials with a EUR500m 30 non-call 10 Tier 2 trade.

The Spanish insurer was approaching the market in conjunction with taking full control of Mapfre BB SH2, the Brazilian company through which it runs a strategic alliance with Banco do Brasil, for around EUR546m. Announcing the updated cooperation with Banco do Brasil in June, Mapfre said hybrid debt issuance would help fund the transaction and mitigate its impact on the insurer’s solvency capital.

Mapfre approached the market on 30 August despite ongoing noise around emerging markets in Latin America and elsewhere, with Bonnal at joint lead CACIB noting that conditions had stabilised in the preceding sessions. The issuer did not hold a roadshow, but opted for one-and-a-half day execution to give time to prepare for the new issue, including calls with investors.

A 15% interest rate hike in Argentina then sparked a renewed sell-off in emerging market assets overnight, but Mapfre went ahead with its new issue on the back of encouraging feedback from investors, according to Bonnal. However, with its outstanding 2047 non-call 2027 issue having fallen some two points since the new issue’s announcement, pricing and IPTs had to be considered carefully, he added.

The leads went out with initial price thoughts of the mid-swaps plus 340bp area for a benchmark-sized 30 non-call 10 issue, rated BBB- by Fitch, and after around an hour and a half orders had surpassed EUR500m. After three hours guidance was revised to the 330bp area and the size set at EUR500m on the back of over EUR750m of demand, and books went subject after around three and a half hours, with the pricing fixed at 330bp shortly after with orders above EUR700m, pre-reconciliation.

“It was a really good sign that we got hardly any drops when we tightened 10bp,” said Bonnal, noting the move was larger than on some recent subordinated trades.

“This issuance further proves the confidence institutional investors have in Mapfre,” said Fernando Mata, Mapfre CFO. “We have achieved very satisfactory financial conditions even in the current complex market environment.”